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Rating Action:

Moody's affirms Baidu's A3 ratings; outlook changed to stable from positive

23 Dec 2020

Hong Kong, December 23, 2020 -- Moody's Investors Service has affirmed Baidu Inc.'s A3 issuer and senior unsecured ratings, and has revised the rating outlook to stable from positive.

"The rating affirmation reflects Baidu's demonstrated ability to recover from temporary business disruptions, its improved debt leverage and excellent liquidity position, which reflect its prudent financial policies," says Lina Choi, a Moody's Senior Vice President.

"Meanwhile, the rating outlook was changed to stable as we believe its management remains committed to a credit profile consistent with the company's A3 ratings and prefers to retain its excess financial capacity and balance sheet flexibility," adds Choi.

RATINGS RATIONALE

Baidu's A3 issuer rating reflects the company's position as the leading Chinese-language internet search engine and one of the largest providers of online advertising services in China.

The rating also considers Baidu's steady free cash flow, disciplined acquisitions and demonstrated ability to recover from temporary business challenges.

However, Baidu's rating is constrained by China's competitive internet market, increasing acquisition risks related to the company's efforts to build an artificial intelligence- (AI) powered platform, and potential reputational risks associated with its deconsolidated financial service business, Du Xiaoman Financial. Baidu has been a minority shareholder of Du Xiaoman since April 2018.

Moody's expects that the resumption of economic activities as China gains control of the coronavirus pandemic will benefit the online advertising industry and Baidu. The company has since 2017 developed a number of AI-enhanced products and services and, as a result, will continue to generate stable revenue and cash flow growth around 5.0%-7.0% per annum in the next 12-18 months.

Additionally, if Baidu completes its acquisition of YY.com as scheduled, Moody's estimates it will bring an additional RMB10-12 billion in revenue and RMB3-3.5 billion in EBITDA, on a fully consolidated basis.

Baidu's profit margins and earnings have recovered steadily from a brief period of heavy investment in new business initiatives in H1 2019, driven by the gradual monetization of new initiatives such as its cloud and AI-enhanced newsfeed, and prudent cost-control measures. Nevertheless, the company will need to continue investing in its new products and strengthening user stickiness. As a result, Moody's expects Baidu's adjusted EBITDA margin will decline moderately from 39.8% for the 12 months ended 30 September 2020.

The company has several ongoing projects that will require investment, which along with its new shareholder-return requirements, underscore its management's preference for financial flexibility.

Its new AI-related products and services, such as autonomous driving, AI Cloud and DuerOS voice assistant, are still in the early development and fast growth phases, while iQiyi, Baidu's fully consolidated online video subsidiary, will require heavy investment for content creation and acquisition.

Meanwhile, the company announced on 8 December that it had upsized its share repurchase program to USD4.5 billion from USD3 billion, covering potential market repurchases through to 2022.

Moody's therefore expects Baidu's leverage will rise to around 2.5x in the next 12-18 months, which still places the company appropriately in the A3 rating category. The company's leverage had improved steadily to 1.84x for the 12 months ended 30 September 2020 from the peak of 2.6x recorded at 30 September 2019.

Baidu has excellent liquidity and a good net cash position. It had around RMB145.3 billion (USD22.4 billion) in cash, cash equivalents and short-term investments as of 30 September 2020. This strong cash balance, together with its estimated operating cash flow of around RMB19.6 billion (USD3 billion), should be sufficient to cover its investment needs and RMB15.9 billion in debt (including a RMB4.6 billion short-term operating lease liability) maturing over the next 12 months.

Baidu's issuer rating is not affected by subordination to claims at the operating company level. This is because the holding company: (1) owns key licenses to operate its business, and (2) benefits from contractual cash flow upstreams from its operating companies, which mitigate structural subordination risk.

Baidu's ratings also consider the following environmental, social and governance factors.

The company bears social risks related to privacy and data security. The risk level is moderate because Baidu transmits and stores confidential data and other types of sensitive records from users, customers, distributors, content providers and Baidu Union partners to provide security-critical services, including banking, autonomous driving and healthcare, which expose the company to legal, regulatory or reputational risks in the event of a cybersecurity breach. These could include claims, fewer growth opportunities, rising operating costs or declining user growth and engagement.

Baidu complies with legal and regulatory requirements for the collection, processing, retention and protection of data by implementing an up-to-date data security system, which mitigates the above risks.

In terms of governance, Moody's has considered the high concentration of voting power in the company's key shareholder, Robin Yanhong Li. However, this risk is partially mitigated by (1) the company's track record as a listed and regulated entity on the New York Stock Exchange; and (2) its track record of maintaining a prudent financial policy that has provided buffers amid market volatilities.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that Baidu will maintain metrics consistent with its A3 rating, including strong credit quality through the business cycles, excellent liquidity, prudent financial policy and a solid net cash position. These factors will provide buffers against the company's future investment needs and any financial or reputational risks associated with Du Xiaoman, its 41%-owned financial services subsidiary.

Moody's could upgrade Baidu's ratings if (1) the company maintains a strong financial profile while growing its core search business by monetizing new product initiatives; (2) it remains prudent in its investments and new AI-related business initiatives; (3) it demonstrates a balanced use of its funding channels as it expands its business scale and scope while maintaining a strong financial profile; and (4) if Du Xiaoman does not require additional funding from its shareholders, including Baidu.

Financial metrics indicative of an upgrade include adjusted debt/EBITDA, including adjustments for loss provisions at Du Xiaoman, declining to 2.0x or lower on a sustained basis.

Downward rating pressure could emerge if Baidu (1) fails to maintain a steady EBITDA because of a deterioration in its market position and a subsequent decline in its market share, which in turn affects its revenue growth and/or cash flow generation; (2) engages in aggressive investments or acquisitions that strain its balance-sheet liquidity or increase its overall risk profile; or (3) experiences financial stress at or capital calls from Du Xiaoman.

Financial metrics indicative of a downgrade include adjusted debt/EBITDA rising above 2.5x-2.8x or a net debt position, both on a sustained basis. Moody's will also monitor for any sustained deterioration in the company's retained cash flow/debt, which has stayed at around 15.0%-35.0% since 2015.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2000 and listed on the NASDAQ in 2005, Baidu Inc. (Baidu) is the dominant company in China's internet search market. It has a combined personal computer (PC) and mobile traffic share of more than 65% in the Chinese online search market. Baidu continues to improve the search experience by adding and optimizing features, including news feeds, voice search and image search.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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